Episode 6 – June 29, 2016

CECL / Investing in Banks / Fintech / DFAST / BREXIT

Podcast Show Notes:

Our This Month In Banking (TMIB) podcast highlights significant news and events in banking and our hosts’ take on them, along with interviews with industry thought leaders. TMIB will be available on the last Wednesday of every month here, on Stitcher, Soundcloud, and iTunes for your listening enjoyment. Join us on your commute or at your desk.

This month Richard J. Parsons is our guest for the entire podcast to discuss a variety of banking topics. Mr. Parsons is a banking industry analyst, speaker, and writer. His newest book, Investing in Banks: Strategies and Statistics for Bankers, Directors, and Investors, was recently published by The Risk Management Association. In this book he examines long-term bank stock performance and identifies specific factors that create and destroy shareholder value. He is also the author of Broke: America’s Banking System, published in 2013. In this book Mr. Parsons explains why the U.S. banking system has suffered nearly 3,500 bank failures over the past three decades. Mr. Parsons is a frequent contributor to American Banker and The Risk Management Journal.

Topic 1: Is CECL the Biggest Change the Banking Industry Has Ever Faced?

Start time 3:12

After years in the making and countless articles and debates, on June 16, 2016 the Financial Accounting Standards Board (FASB) released its long-awaited revised guidance on credit losses related to financial instruments, ASC Topic 326 “Financial Instruments – Credit Losses”. CECL effectively requires bankers to record, at the time of origination, credit losses expected throughout the life of a loan and held-to-maturity securities. CECL is replacing the incurred-loss model currently in place. Much has been made about the financial ramifications and impact, the cost of implementation and so on. It has been called the biggest change in the history of bank accounting and parallels have been made to Y2K and Basel III regarding impact on the industry.

However uncertainties exist with CECL, many of which are operational in nature. Importantly, will CECL’s implementation cause banks to change underwriting standards and with it, will banks improve risk-adjusted pricing on credit?

Topic 2: The Future of Investing in Banks

The first sub-segment (start time 10:02) of our discussion focuses on the topic of “the rise of fintech”. In his book, Mr. Parsons raises questions regarding the pace at which banks are changing to address fintech and states that while bank stocks languish, fintech lenders have emerged to capture investor interest. He warns to beware of banks that dismiss the fintech emerging competitors. Or will fintech become more regulated and benefit from partnerships with banks?

The second sub-segment (start time 16:07) is about capital. Upon release yesterday of the DFAST supervisory results and as we await CCAR reporting results, Fed officials have commented recently that the Fed is “very likely” to exempt those banks with less than $250 billion in assets that are currently subject to the Dodd-Frank stress testing requirements from certain elements of those requirements.

What does the industry do to reconcile the difference between regulatory desires for high levels of capital and investor requirements for return on equity?

A new complicating factor for bank investing is Britain’s decision to leave the European Union. The actual impact won’t be known for years; however, in the short-term, central banks from around the world will likely continue with easy monetary policy to stave off any potential global recession. Brexit could affect community banks in the U.S. in that the Fed will not raise rates as quickly as originally thought, if at all. Will a continued stagnant rate environment further push industry consolidation but with lower pricing for acquisitions?

Watch for episode 7 of This Month in Banking to be released on Wednesday, July 27, 2016 and a new episode on the last Wednesday of every month.